Which of the following will increase the operating cycle?
A)The cash cycle decreases by one day but the average payment period increases by two and a half days.
B)The days' sales in inventory decreases by one day but the average collection period increases by two days.
C)COGS stays the same but inventory increases.
D)All of the options will increase the operating cycle.

Question

Quizplus · Accepted Answer

The operating cycle is the time it takes for a company to convert its inventory into cash. It is calculated as the sum of the days' sales in inventory, the average collection period, and the average payment period.Option A: The cash cycle decreases by one day but the average payment period increases by two and a half days. This will increase the operating cycle because the average payment period is a component of the operating cycle.Option B: The days' sales in inventory decreases by one day but the average collection period increases by two days. This will increase the operating cycle because the days' sales in inventory and the average collection period are both components of the operating cycle.Option C: COGS stays the same but inventory increases. This will increase the operating cycle because inventory is a component of the operating cycle.Therefore, all of the options will increase the operating cycle.

Which of the Following Will Increase the Operating Cycle